Allegiant defends new Boeing 737 MAX order

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FILE PHOTO: The first Boeing 737 MAX 7 is unveiled in Renton

By Eric M. Johnson and Rajesh Kumar Singh

SEATTLE/CHICAGO (Reuters) -Allegiant Travel Co on Thursday tried to ease concerns among investors that a plan to add 50 new Boeing Co 737 MAX planes to its fleet of used Airbus jets would drive up operating costs.

The Las Vegas-based company, which runs an ultra-low-cost carrier, said the $5.5 billion jet deal was part of its long-term growth strategy and would result in more than $300 million in savings.

“Strategically, you can’t be all used car,” said Chief Executive Maury Gallagher told investors on a call.

Allegiant’s shares fell more than 8% on Wednesday after the company confirmed plans, first reported by Reuters, to buy 737 MAX 7 and 737 MAX 8-200 jets. Shares were up about 2% on Thursday.

The Boeing order marks a stark change of approach by the fast-growing domestic carrier, which had previously relied mainly on used Airbus aircraft.

The strategy to fly highly used, older Airbus aircraft has helped the company keep its costs low. Allegiant’s cost per available seat mile (CASM) – the standard measure in the industry showing what it costs to fly one seat one mile – is estimated to be at least 35% below the major airlines, according to CFRA Research.

Analysts say a mixed fleet could increase its operating costs.

Allegiant, however, said the annual ownership and fuel cost of the MAX planes is expected to be lower than its current fleet, and the new aircraft would generate higher earnings.

The ultra-low-cost carrier aims to seize on post-pandemic leisure travel demand by adding more than 400 routes. It is looking to have more than 250 aircraft by the end of this decade.

But as the size of its fleet grows, the company reckons it would be difficult to source enough used spare parts for maintenance.

Gallagher said the prospect of running a fleet of more than 100 used planes was no longer tenable. “No airline in the world is run that way – you just can’t do it,” he said.

Allegiant’s expansion is the latest sign of growth among ultra-low-cost carriers that combine rock-bottom fares with optional charges. Such carriers are expected to emerge in a position of relative strength from the COVID-19 pandemic.

The company said its “bias” would be to finance and own the Boeing aircraft as it has the financial ability to make the deal.

Allegiant will buy 30 737 MAX 7 aircraft and 20 737 MAX 8-200 aircraft. It will take delivery of 10 of the jets in 2023, 24 in 2024, and 16 in 2025.

The deal is a boost for Boeing after two key medium-haul customers, Qantas and several affiliates of Air France-KLM, switched to Airbus in December.

(Reporting by Eric M. Johnson in Seattle and Rajesh Kumar Singh in Chicago; Editing by Elaine Hardcastle, Mark Porter and Cynthia Osterman)

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